UAE introduces federal level virtual asset regulation

The Cabinet has issued a decision which brings into force a new regulation for virtual assets and virtual asset service providers, adding another layer of oversight to the UAE’s virtual asset sector. The new regulation is expected to come into effect on 15 January 2023 and will form the UAE’s primary supervisory regime for virtual assets. 

The regime is designed to both protect investors and supervise the industry, having recognised the perceived risks posed to investors in virtual assets. The UAE Cabinet also said that the regulation would “support the efforts of the state to provide an attractive investment economic and financial environment for international companies and institutions operating in the virtual assets sector to provide their services in the state”.

Prior to the federal level regulation, several supervisory initiatives for virtual assets were introduced to particular parts of the UAE, such as the financial free zones – Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre (DIFC). The Emirate of Dubai has also recently introduced its own virtual asset regime and established Dubai’s Virtual Asset Regulatory Authority (VARA).

“The federal Cabinet decision is an expected and welcome legislative development. Given the importance and risk profile of the UAE’s virtual asset sector, federal level rules were always going to be forthcoming,” said financial services expert Tom Bicknell of Pinsent Masons.

According to Bicknell, a particularly interesting aspect of the new regime is the interaction between the local authorities and the federal regulatory body, the UAE’s Securities and Commodities Authority (SCA).

“What is interesting is the tacit recognition that ‘local licensing authorities’ would still maintain some position in the ecosystem albeit firms looking to be licensed by them will need to consider whether an SCA licence is also necessary for them to carry on their business,” said Bicknell.

While the regimes of financial free zones like ADGM and DIFC are exempted from the federal financial services rules, the Cabinet takes a more nuanced approach to how it intends to interact with the developing VARA regime and its Abu Dhabi counterpart – described in the regulation as ‘local licensing authorities’. 

“Whilst acknowledging that parties who have applied for or hold a licence from a ‘local licensing authority’ may not need to also obtain a licence from SCA, SCA also reserves the position to directly authorise and licence these parties. The Cabinet decision indeed makes clear that SCA is the pre-eminent authority in terms of the virtual asset eco-system whilst recognising that certain of its supervisory functions may be re-allocated to local licensing authorities in due course,” Bicknell explained.

In addition to the licensing provisions and new obligations and compliance requirements, the regulation also include provisions of panelises for breaching the rules. They range from a warning and suspension of the listing or trading of virtual assets to revocation of licence and a fine up to AED10 million (US$2.7m).